What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-04 compared with 2020-08-05 · 150 added, 138 removed, 228 unchanged (56% of the section changed)

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All statements contained herein that are not clearly historical in nature are forward-looking, and words such as “believe,” “anticipate,” “expect,” “estimate,” “may,” “will,” “should,” “continue,” “plans,” “potential,” “intends,” “likely,” or other similar words or phrases are generally intended to identify forward-looking statements.

Any forward-looking statement contained herein, in press releases, written statements or documents filed with the Securities and Exchange Commission, or in Koppers communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls, regarding expectations with respect to sales, earnings, cash flows, operating efficiencies, restructurings, product introduction or expansion, the benefits of acquisitions and divestitures, joint ventures or other matters as well as financings and debt reduction, are subject to known and unknown risks, uncertainties and contingencies.

Any forward-looking statement contained herein, in press releases, written statements or documents filed with the Securities and Exchange Commission, or in Koppers communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls, regarding expectations with respect to sales, earnings, cash flows, operating efficiencies, restructurings, product introduction or expansion, the benefits of acquisitions and divestitures, or other matters as well as financings and debt reduction, are subject to known and unknown risks, uncertainties and contingencies.

Many of these risks, uncertainties and contingencies are beyond our control, and may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements.

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general economic and business conditions;

the length and extent of economic contraction as a result of the coronavirus (COVID-19) pandemic;

existing and future adverse effects as a result of the coronavirus (COVID-19) pandemic;

disruption in the U.S.

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Our products and services are used in a variety of niche applications in a diverse range of end-markets, including the railroad, specialty chemical, utility, residential lumber, agriculture, aluminum, steel, rubber, and construction industries.

We serve our customers through a comprehensive global manufacturing and distribution network, with manufacturing facilities located in North America, South America, Australasia, China and Europe.

We serve our customers through a comprehensive global manufacturing and distribution network, with manufacturing facilities located in North America, South America, Australasia, and Europe.

We operate three principal businesses:

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The COVID-19 outbreak began to have a global effect in the first quarter of 2020 and continues to have a significant impact on global markets driven by supply chain and production disruptions, workforce restrictions, reduced spending and other factors.

These events negatively impacted our financial performance, primarily with respect to our CMC business in the first two quarters of 2020 and are expected to negatively impact our financial performance in future periods.

During the COVID-19 pandemic, substantially all of our global businesses have continued to operate within a critical infrastructure sector (as established by the Cybersecurity & Infrastructure Security Agency of the U.S.

Department of Homeland Security, as well as other governments worldwide), and as a result, we have been able to meet the demand of our customers in the various markets we serve.

Our operations were curtailed in two locations, China and New Zealand, after government restrictions required the temporary closure of operations.

These operations have returned to service in the second quarter of 2020.

Our operations were temporarily curtailed in New Zealand after government restrictions required the temporary closure of operations during the first half of the year.

Our remaining 31 facilities, principally in the United States, Canada, the United Kingdom, Australia and Denmark, were permitted to continue to operate.

As of September 30, 2020, all facilities in our manufacturing network are fully operational.

Another impact of the pandemic is that more individuals are spending more time in their homes, and as a result, big-box retailers are continuing to report strong demand for home improvement projects.

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Maintaining adequate liquidity and financial flexibility by launching several cost-reduction initiatives and contingency plans to raise and conserve cash in all aspects of our operations and utilizing available federal relief such as the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which we continue to evaluate.

The full extent to which COVID-19 will adversely impact our business depends on future developments, which are highly uncertain and unpredictable, including new information concerning the severity of the outbreak and the effectiveness of actions globally to contain or mitigate its effects.

Our condensed consolidated financial statements and discussion and analysis of financial condition and results of operations reflect estimates and assumptions made by us as of June 30, 2020.

Events and changes in circumstances arising after June 30, 2020, including those resulting from the impacts of COVID-19, will be reflected in our estimates for future periods.

The full extent to which COVID-19 will adversely impact our business depends on future developments, which are highly uncertain and unpredictable, including new information concerning the ultimate severity of the outbreak and the effectiveness of actions globally to contain or mitigate its effects.

Our condensed consolidated financial statements and discussion and analysis of financial condition and results of operations reflect estimates and assumptions made by us as of September 30, 2020.

Events and changes in circumstances arising after September 30, 2020, including those resulting from the impacts of COVID-19, will be reflected in our estimates for future periods.

Refer to the Liquidity section of Management’s Discussion and Analysis for the impact of the global pandemic on our liquidity.

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According to the Railway Tie Association (“RTA”), the estimated total crosstie installations in 2019 were approximately 20 million, of which 15 million were for Class I railroads.

For 2020, RTA has not provided a forecast given the uncertainties related to COVID-19, but has reported , in general, the railroad industry is managing to offset lower volumes with increased productivity.

In fact, certain railroads are taking advantage of reduced track time to increase maintenance on their infrastructure.

For 2020, the RTA has projected that approximately 17 million crossties will be installed, given the uncertainties related to COVID-19.

T hroughout 2020, freight-rail traffic continued to decline, and passenger railroads and transit systems suspended or canceled operations due to lower ridership from stay-at-home restrictions.

The reduced activity prompted larger track maintenance windows to be available and, as a result, the railroad industry is managing to offset lower volumes with increased productivity as certain railroads are taking advantage of reduced track time to increase maintenance on their infrastructure.

For distribution poles, nearly half of the installed base is over 40 years old and demand has historically been in the range of two to three million poles annually.

On an overall basis, we believe that the rate at which utilities purchase utility poles will grow as they continue replacement programs within their service territories.

As a whole, utilities need to maintain their infrastructure to avoid interruptions in service as large sections of the population continue to work remotely due to the COVID-19 pandemic.

As such, we anticipate that 2020 demand will be relatively stable to slightly higher, although certain utilities are having issues securing line hardware and transformers which could push some second-half 2020 projects into 2021 .

As a whole, the key factors that drive growth in the utility poles market include growing global energy consumption as well as expansion of the global telecommunication industry.

Now more than ever, utilities need to maintain their infrastructure to avoid interruptions in service as large sections of the population continue to work remotely due to the COVID-19 pandemic.

Longer term, we are evaluating opportunities to potentially expand our market presence in the U.S.

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Approximately 70 percent of our North American sales are under long-term contracts and we believe that we are positioned to maintain or grow our current market position.

According to the American Association of Railroads, even though rail traffic in 2020 lags significantly from the prior year, Class I railroad activities began improving in May and that has continued into June.

Freight, coal, automotive and support industry-related loadings all saw either increases or stabilization.

Through June 30, 2020, total U.S.

carload traffic decreased 15.9 percent from the same period last year, while intermodal units dropped by 10.6 percent.

According to the American Association of Railroads (“AAR”), even though rail traffic in 2020 lags significantly from the prior year, Class I railroad activities began improving in May and that has continued, particularly in intermodal units.

Through September 30, 2020, total U.S.

carload traffic decreased 15.3 percent from the same period last year, while intermodal units were lower by 5.9 percent.

The combined U.S.

traffic for carloads and intermodal units fell by 13.2 percent.

In terms of raw material, while forestry has generally been deemed essential during the COVID-19 outbreak, new construction is not considered essential in certain states.

While this has impacted some of the sawmills, we have not experienced a noticeable impact to date as most sawmills are continuing to produce poles and crossties to maintain their operations and cash flow.

traffic for carloads and intermodal units declined by 10.4 percent.

According to the AAR, coal and other energy-related rail commodities remain challenged.

However, intermodal traffic is closer than any other rail traffic category to pre-pandemic levels and continues to improve as retailers and others are restocking inventories to prepare for the upcoming holiday season.

In terms of raw material, while forestry has generally been deemed essential during the COVID-19 outbreak and tie demand has remained consistent, sawmills are being hampered by low demand in other key markets such as wood fibers used in palettes or shipping containers or mats for the oil and gas industry.

So far to date, we have not experienced a noticeable impact as sawmills are continuing to produce poles and crossties to maintain their operations and cash flow.

The RTA reports that the availability of logs is near the ideal rate, as is the outlook for log availability over the next six to 12 months.

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With 16 North American RUPS treating facilities operating at less than full utilization, our goal is to either capture more volume through the existing facilities or consolidate our operating footprint.

In June 2020, we announced the closure of our Denver, Colorado facility and we have targeted the third quarter of 2020 for discontinuing activities at this location and, as such, in the second quarter of 2020 we recorded charges of $4.2 million for asset retirement obligations, fixed asset write-offs and severance.

In June 2020, we announced the closure of our Denver, Colorado facility and, as such, in the second quarter of 2020 we recorded charges of $5.8 million for asset retirement obligations, fixed asset write-offs and severance.

As of September 30, 2020, we have discontinued treating activities at this location.

As a result of this closure, we expect additional restructuring and related charges to earnings of approximately $4 to $9 million through 2021.

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Product demand for our PC business has historically been closely associated with consumer spending on home repair and remodeling projects, and therefore, trends in existing home sales serve as a leading indicator.

Overall, the market for existing homes are show ing some improvements .

According to the National Association of Realtors® (“NAR”), total existing-home sales rebounded at a record pace in June showing signs of a market turnaround after three straight months of sales declines caused by the pandemic .

According to the NAR, t otal existing home sales increased 20.7 percent since May , although overall home s ales were down 11.3 percent from a year ago.

According to the Leading Indicator of Remodeling Activity (“LIRA”) reported by the Joint Center for Housing Studies of Harvard University, expenditures for improvements and repairs to owner-occupied homes are expected to slow by the middle of next year as the COVID-19 pandemic continues to unfold.

LIRA projects annual declines in renovation and repair spending of 0.4 percent by mid-2021 as the pace of home improvement and repairs tapers off.

The Conference Board Consumer Confidence Index® decreased in July, after increasing in June.

The Index now stands at 92.6, down from 98.3 in June.

Consumers are less optimistic about the short-term outlook for the economy and labor market, likely due to a resurgence of COVID-19 in certain regions.

Although the market data and projections for home improvements continue to vary widely, w e are anticipating continued strong demand for residential treated wood in North America, primarily in the U.S.

Overall, the market for existing homes have rebounded and are show ing strong demand during the past several months .

According to the National Association of Realtors® (“NAR”), total existing-home sales grew in September for the fourth consecutive month.

According to the NAR, t otal existing home sales increased 9.4 percent from August, and up 20.9 percent from a year ago.

The increased buying activity is attributed to record-low interest rates and higher demand for existing homes, which includes buyers of vacation homes given the flexibility to work remotely.

According to the Leading Indicator of Remodeling Activity (“LIRA”) reported by the Joint Center for Housing Studies of Harvard University, moderate gains in homeowner spending for improvements and repairs are expected through much of 2021 as initial concerns of a possible pandemic-induced downturn have largely dissipated .

The Remodeling Futures Program is no longer providing a downside range for its home remodeling outlook, given the resilience of housing markets.

The LIRA projects annual growth in renovation and repair spending of 4.1 percent by the first quarter of 2021 with gains softening to 1.7 percent by the third quarter of 2021 .

The Conference Board Consumer Confidence Index® increased in September, after declining in August.

The Index now stands at 101.8, up from 86.3 in August .

While the Index increased substantially in September, after back-to-back monthly declines, it remains below pre-pandemic levels .

Consumers have a more favorable view of current business and labor market conditions, along with renewed optimism about the short-term outlook .

Although the market data and projections for home improvements are continually changing, w e are anticipating continued strong demand for residential treated wood in North America, primarily in the U.S.

In looking at residential renovation markets, businesses are indicating a more positive outlook for 2020 than at the beginning of pandemic.

In addition, the housing industry reported an increase in the number of buyers who are actively pursuing the purchase of a new or existing home, which supports a continued favorable outlook.

As homeowners are focusing on the importance of their homes in a work-life environment and with interest rates at historically low levels, we expect the pace to continue at least through 2020.

As homeowners are focusing on the importance of their homes in a work-life environment and with interest rates at historically low levels, we expect the pace to continue at least through 2020 and potentially into 2021.

Regarding our supply chain, we continue to evaluate copper hedges for the 2021-2022 timeframe, which on average are at lower average costs compared with 2020.

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The CMC business currently supplies our North American RUPS business with its creosote requirements.

On February 18, 2020, we entered into a definitive agreement to sell Koppers (Jiangsu) Carbon Chemical Company Limited (“KJCC”) to Fangda Carbon New Material Co., Ltd and C-Chem Co., Ltd., a subsidiary of Nippon Steel Chemical & Material Co., Ltd.

KJCC is a 75 percent-owned coal tar distillation company which is part of our CMC segment.

On April 29, 2020, the pending divestiture reached a key milestone by receiving antitrust approval from China’s State Administration for Market Regulation of China (SAMR).

In 2019, KJCC’s sales totaled $127.4 million and its operating profit totaled $5.9 million.

The sales price is $107.0 million, subject to adjustment for cash, debt and working capital at closing, which is expected to occur in the third quarter of 2020 due to required regulatory approvals in China and achievement of other closing conditions.

At closing, we estimate the gain on the sale of KJCC will be approximately $45 million and net cash proceeds to Koppers will be approximately $65 million, after noncontrolling interest, taxes and expenses.

The results of KJCC are reflected as a discontinued operation in the consolidated financial statements and the supporting footnotes.

In the third quarter of 2019, we ceased remaining production activities at our Follansbee, West Virginia.

On September 30, 2020, we sold KJCC to Fangda Carbon New Material Co., Ltd and C-Chem Co., Ltd., a subsidiary of Nippon Steel Chemical & Material Co., Ltd.

KJCC was located in Pizhou, Jiangsu Province, China and was a 75 percent-owned coal tar distillation company which was part of our CMC segment.

The sales price was $107.0 million, subject to adjustments for cash, debt and working capital as defined in the sale and purchase agreement.

The pre-tax gain on the sale of KJCC was $44.1 million and the after tax gain on the sale was $35.8 million.

The net cash proceeds to Koppers was $65.2 million, after noncontrolling interest, Chinese capital gain taxes, transaction costs and estimated working capital adjustments.

Included in the cash proceeds is restricted cash of $2.3 million which is being held in an escrow account to cover potential customary indemnity claims by the buyers for a period of 18 months.

In the third quarter of 2019, we ceased remaining production activities at our Follansbee, West Virginia facility.

As a result of this action and other previously disclosed initiatives to reduce capacity in our CMC business, we expect additional restructuring and related charges to earnings of approximately $2 million to $5 million through 2021.

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Over the past five years we have consolidated our operating footprint and significantly lowered production levels at the same time that we added distribution assets to move finished products from Europe to the United States more efficiently.

In addition, we entered into several new long-term supply agreements starting in 2017 to further lower our exposure to coal tar availability risk and volatile end markets.

As a result, our raw material needs in North America have been significantly less than historically required.

For the external markets served by our CMC business, we expect that North America and Europe will be significantly impacted by the COVID-19 pandemic.

We are seeing significant declines in auto manufacturing capacity and other industrial production markets, and consequently, that is resulting in lower demand for our products.

Carbon pitch and phthalic anhydride markets have begun to soften due to declines in demand as manufacturing activity in North America and Europe significantly slowed.

In addition, we entered into several new long-term supply agreements starting in 2017 to further lower our exposure to coal tar availability risk and volatile end markets.

For the external markets served by our CMC business, we expect that North America and Europe will continue to be significantly impacted by the COVID-19 pandemic.

We have seen significant declines in auto manufacturing capacity and other industrial production markets, and consequently, that has resulted in lower demand for our products.

Carbon pitch and phthalic anhydride markets have softened due to declines in demand as manufacturing activity in North America and Europe significantly slowed.

In addition , end market pricing for some products has been under pressure in certain regions due to the significant fall in worldwide oil prices.

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In North America, the pullback in steel production had led to lower domestic coal tar availability and an increase in raw material imports to North America at higher prices, while markets in Europe and Australia remain relatively steady.

Although automakers had shut down in recent months, the demand for new cars has been improving and therefore, production is resuming for certain models in the second half of 2020.

Although automakers had shut down in recent months, the demand for new cars has been improving and therefore, production has resumed for certain models in the second half of 2020.

Overall, the cost of coal tar is decreasing in line with end markets, but lagging by approximately three months.

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Historically, our operating results have been significantly lower in the first and fourth calendar quarters as compared to the second and third calendar quarters.

Results of Operations – Comparison of Three Months Ended June 30, 2020 and 2019

Results of Operations – Comparison of Three Months Ended September 30, 2020 and 2019

Consolidated Results

Net sales for the three months ended June 30, 2020 and 2019 are summarized by segment in the following table:

Three Months Ended June 30,

Net sales for the three months ended September 30, 2020 and 2019 are summarized by segment in the following table:

Three Months Ended September 30,

(Dollars in millions)

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Carbon Materials and Chemicals

RUPS net sales increased by $10.8 million or five percent compared to the prior year period.

The sales increase was primarily due to volume increases in the Class I crosstie market as well as the domestic and Australian utility pole markets, along with price increases in the commercial crosstie market in the current year period.

Sales of crossties increased by $9.7 million in the current year period.

These increases were offset, in part, by volume decreases in our maintenance-of-way businesses and an unfavorable impact from foreign currency translation in the current year period of $0.5 million from our Australian pole business.

RUPS net sales decreased by $7.8 million or four percent compared to the prior year period.

The sales decrease was primarily due to modest volume decreases in the commercial crosstie market as well as the domestic utility pole market, along with a slight unfavorable pricing impact of customer discounts in the Class I crosstie market in the current year period.

Sales of crossties decreased by $9.2 million in the current year period.

These decreases were offset, in part, by volume increases in our Australian utility pole market and our crosstie disposal business and pricing increases in our domestic utility pole market.

PC net sales in creased by $ 24 .0 million or 19 percent compared to the prior year period.

These increases were partially offset by a decrease in sales volumes in all of our international markets and an unfavorable impact from foreign currency translation in the current year period of $ 1.9 million.

CMC net sales decreased by $34.3 million or 28 percent compared to the prior year period due mainly to lower sales prices for carbon pitch and carbon black feedstock globally and lower sales prices for phthalic anhydride in North America as a result of depressed oil prices in the current year period.

Other contributing factors include lower sales volumes of carbon pitch globally, lower sales volumes of phthalic anhydride in North America and lower sales volumes of carbon black feedstock in Europe as a result of the pandemic.

Foreign currency translation also had an unfavorable impact on sales in the current year period of $1.3 million.

Cost of sales as a percentage of net sales was 77 percent for the quarter ended June 30, 2020 compared to 79 percent in the prior year quarter.

Gross margin at PC was favorably impacted by a net amount of $10.1 million due to changes in unrealized gains and losses from our copper swap contracts.

Lower gross margins for CMC in the current year period were a result of lower sales volumes and prices for carbon pitch globally.

Depreciation and amortization charges for the quarter ended June 30, 2020 were consistent with the prior year period .

Impairment and restructuring charges for the quarter ended June 30, 2020 were consistent with the prior year period .

We recorded charges of $2.9 million for asset retirement obligations and $1.3 million for fixed asset write-offs and severance in the three months ended June 30, 2020 related to the announced closure of our Denver, Colorado facility.

Prior year charges consisted of asset retirement obligation charges and inventory and fixed asset write-offs related to the closure of our Follansbee, West Virginia facility.

Selling, general and administrative expenses for the quarter ended June 30, 2020 were $3.5 million lower when compared to the prior year period due mainly to a decrease of $1.1 million for employee benefit related expenses and $2.6 million for travel and facility related costs.

These decreases were partially offset by an increase in employee incentive expense in the current year period.

Interest expense for the quarter ended June 30, 2020 was $2.9 million lower when compared to the prior year period primarily due to our lower average debt level and lower interest rates due to the recent drop in LIBOR rates.

Income tax expense for the quarters ended June 30, 2020 and 2019 was $8.0 million.

Income before income taxes was $15.1 million higher in the quarter ended June 30, 2020 when compared to the prior year period.

However, the related increase to income tax expense was offset by a lower estimated annual effective income tax rate in the quarter ended June 30, 2020 when compared to the prior year period.

Also, the quarter ended June 30, 2020 included tax benefits of $2.4 million principally related to provisions of the CARES Act.

Income tax expense as a percentage of pre-tax profit for the quarters ended June 30, 2020 and 2019 were 21.4 percent and 35.9 percent, respectively.

See Note 10 – “Income Taxes” for further detail.

The sales increase was due primarily to higher demand for copper-based preservatives in North America due to new customer additions and higher organic volumes driven by increased home repair and remodeling activities during the pandemic , along with an increase in sales volumes in our international markets resulting from pent-up demand due to several months of restrictions associated with the pandemic.

CMC net sales decreased by $12.9 million or 12 percent compared to the prior year period due mainly to lower sales prices for carbon pitch, carbon black feedstock and phthalic anhydride as a result of depressed oil prices in the current year period.

These decreases were offset, in part, by volume increases of carbon pitch in Australia and phthalic anhydride in North America.

Foreign currency translation also had a favorable impact on sales in the current year period of $3.3 million.

Cost of sales as a percentage of net sales was 75 percent for the quarter ended September 30, 2020 compared to 80 percent in the prior year quarter.

Gross margin at PC was favorably impacted by higher sales volumes, a favorable sales mix and better absorption on higher production volumes.

Improved margins at RUPS were due to a favorable sales mix in our Class I crosstie market and higher margins in our domestic utility pole and maintenance-of-way markets.

Depreciation and amortization charges for the quarter ended September 30, 2020 were consistent with the prior year period .

Impairment and restructuring charges for the quarter ended September 30, 2020 were consistent with the prior year period .

The current year period included accelerated depreciation, demolition and other plant closure period costs related to the closure of our Denver, Colorado facility.

The prior year period included accelerated depreciation related to the closure of our Follansbee, West Virginia facility.

Selling, general and administrative expenses for the quarter ended September 30, 2020 were $2.5 million lower when compared to the prior year period due mainly to a decrease in consulting and professional service expenses as well as travel and facility related costs.

Interest expense for the quarter ended September 30, 2020 was $3.6 million lower when compared to the prior year period primarily due to our lower average debt level and lower interest rates due to the recent decrease in LIBOR rates.

Income tax expense for the quarter ended September 30, 2020 was $8.6 million, an increase of $5.7 million when compared to the prior year quarter.

The increase is primarily due to i ncome before income taxes being $26.5 million higher in the quarter ended September 30, 2020 when compared to the prior year quarter.

The increase is partially offset by a lower estimated annual effective income tax rate in the quarter ended September 30, 2020 when compared to the prior year quarter.

Income tax expense as a percentage of pre-tax profit for the quarters ended September 30, 2020 and 2019 were 18.0 percent and 13.7 percent, respectively.

Discrete items for the quarter ended September 30, 2020 and the quarter ended September 30, 2020 were approximately the same.

See Note 10 – “Income Taxes” for further detail about the estimated annual effective income tax rate and about the specific discrete items.

Discontinued operations for the quarter ended September 30, 2020 resulted in income of $0.6 million compared to $2.2 million in the prior year period due primarily to a year-over-year reduction in net sales of $31.9 million attributable to the economic effects of COVID-19 on our KJCC operations and lower end market demand.

Gain on sale of discontinued operations for the quarter ended September 30, 2020 is related to the sale of our KJCC business in China in September 2020.

See Note 4 – “Discontinued Operations” for further detail.

Segment Results .

Segment operating profit for the three months ended June 30, 2020 and 2019 is summarized by segment in the following table:

Three Months Ended June 30,

Segment operating profit for the three months ended September 30, 2020 and 2019 is summarized by segment in the following table:

Three Months Ended September 30,

(Dollars in millions)

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Carbon Materials and Chemicals

RUPS operating profit in creased by $ 4.4 million compared to the prior year period.

Operating profit as a percentage of net sales in creased to 7.7 percent from an operating profit of 5.

9 percent in the prior year period .

Operating profit as a percentage of net sales for the three months ended June 3 0 , 2020 was favorably impacted by higher margins in our domestic utility pole and maintenance-of-way markets, a favorable sales mix in our commercial crosstie market and lower selling, general and administrative costs in the current year period.

RUPS operating profit increased by $3.7 million compared to the prior year period.

Operating profit as a percentage of net sales increased to 7.9 percent from an operating profit of 5.7 percent in the prior year period.

Operating profit as a percentage of net sales for the quarter ended September 30, 2020 was favorably impacted by higher margins in our domestic utility pole and maintenance-of-way markets, a favorable sales mix in our Class I crosstie market and lower selling, general and administrative costs in the current year period.

PC operating profit increased by $18.7 million compared to the prior year period.

Operating profit as a percentage of net sales increased to 20.6 percent from 9.4 percent in the prior year period.

The current year period was favorably impacted by higher sales volumes, a favorable sales mix and better absorption on higher production volumes during the pandemic along with lower year-over-year raw material prices.

These factors were compounded by a net benefit of $10.1 million due to changes in unrealized gains and losses from our copper swap contracts over the prior year period.

Excluding the effect of unrealized gains from our copper swap contracts, our operating profit as a percentage of net sales would have been 17.8 percent in the current year period.

The current year period was favorably impacted by higher sales volumes in North America driven by increased home repair and remodeling activities during the pandemic, a favorable sales mix, better absorption on higher production volumes during the pandemic and lower selling, general and administrative costs.

CMC operating profit decreased by $0.3 million compared to the prior year period.

Operating profit as a percentage of net sales decreased to 1.7 percent from an operating profit of 10.5 percent in the prior year period.

Operating profit for the quarter ended June 30, 2020 was negatively affected primarily by lower sales prices for carbon pitch and carbon black feedstock globally and lower sales prices for phthalic anhydride in North America as a result of depressed oil prices.

Results of Operations – Comparison of Six Months Ended June 30, 2020 and 2019

Operating profit as a percentage of net sales increased to 13.9 percent from an operating profit of 12.6 percent in the prior year period.

Operating profit for the quarter ended September 30, 2020 was favorably impacted by volume increases of carbon pitch in Australia and phthalic anhydride in North America and lower selling, general and administrative costs in the current year period.

These favorable factors were offset, in part, by lower sales prices for carbon pitch and carbon black feedstock globally and lower sales prices for phthalic anhydride in North America as a result of depressed oil prices in the current year period.

Results of Operations – Comparison of Nine Months Ended September 30, 2020 and 2019

Consolidated Results

Net sales for the six months ended June 30, 2020 and 2019 are summarized by segment in the following table:

Six Months Ended June 30,

Net sales for the nine months ended September 30, 2020 and 2019 are summarized by segment in the following table:

Nine Months Ended September 30,

(Dollars in millions)

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Carbon Materials and Chemicals

RUPS net sales increased by $34.7 million or 10 percent compared to the prior year period.

The sales increase was primarily due to volume increases in the Class I and commercial crosstie markets as well as the domestic and Australian utility pole markets, along with price increases in the commercial crosstie market in the current year period.

RUPS net sales increased by $26.9 million or five percent compared to the prior year period.

The sales increase was primarily due to volume increases in the Class I and commercial crosstie markets as well as the domestic and Australian utility pole markets, along with price increases in the domestic utility pole market in the current year period.

Sales of crossties increased by $24.2 million in the current year period.

These increases were offset, in part, by volume decreases in our maintenance-of-way businesses and certain pricing discounts in the Class I crosstie market in the current year period.

PC net sales increased by $ 52.7 million or 15 percent compared to the prior year period.

CMC net sales decreased by $45.6 million or 19 percent compared to the prior year period due mainly to lower sales prices for carbon pitch and carbon black feedstock globally and lower sales prices for phthalic anhydride in North America as a result of depressed oil prices in the current year period.

Other contributing factors include lower sales volumes of carbon pitch and carbon black feedstock in Europe and North America as a result of the pandemic.

Foreign currency translation also had an unfavorable impact on sales in the current year period of $4.6 million.

Cost of sales as a percentage of net sales and depreciation and amortization charges for the six months ended June 30, 2020 were consistent with the prior year period .

Impairment and restructuring charges for the six months ended June 30, 2020 were consistent with the prior year period .

Prior year charges consisted of asset retirement obligation charges and inventory and fixed asset write-offs related to the closure of our Follansbee, West Virginia facility.

Selling, general and administrative expenses for the six months ended June 30, 2020 were $5.7 million lower when compared to the prior year period due mainly to a decrease of $2.4 million for employee benefit related expenses and $3.8 million for travel and facility related costs.

Interest expense for the six months ended June 30, 2020 was $ 5.

2 million lower when compared to the prior year period primarily due to our low er average debt level and lower interest rates due to the significant drop in LIBOR rates .

Income tax expense for the six months ended June 30, 2020 was $6.2 million as compared to income tax expense of $6.8 million in the prior year period.

Income before income taxes was $6.7 million higher in the six months ended June 30, 2020 when compared to the prior year period.

However, the related increase to income tax expense was offset by a lower estimated annual effective income tax rate in the six months ended June 30, 2020 when compared to the prior year period.

Both periods included benefits related to discrete tax items which significantly influenced the tax provision.

In 2020, we recognized net tax benefits of $4.2 million principally related to provisions of the CARES Act and, in 2019, we recognized net tax benefits of $3.7 million principally related to the reversal of unrecognized tax benefits due to audit closures.

Income tax expense as a percentage of pre-tax profit for the six months ended June 30, 2020 and 2019 were 16.5 percent and 22.1 percent, respectively.

See Note 10 – “Income Taxes” for further detail.

Discontinued operations for the six months ended June 30, 2020 resulted in a loss of $4.4 million compared to income of $2.8 million in the prior year period due primarily to a year-over-year reduction in sales of $61.2 million attributable to the economic effects of COVID-19 on our KJCC operations and lower end market demand.

The sales increase was due primarily to higher demand for copper-based preservatives in North America due to new customer additions and higher organic volumes driven by increased home repair and remodeling activities during the pandemic, along with an increase in sales volumes in our international markets resulting from pent-up demand due to several months of restrictions associated with the pandemic.

These increases were partially offset by an unfavorable impact from foreign currency translation in the current year period of $ 4.3 million.

CMC net sales decreased by $58.5 million or 17 percent compared to the prior year period due mainly to lower sales prices for carbon pitch, carbon black feedstock, phthalic anhydride and naphthalene as a result of depressed oil prices in the current year period.

Other contributing factors include lower sales volumes of carbon pitch and carbon black feedstock as a result of the pandemic.

These decreases were offset, in part, by volume increases of carbon pitch in Australia.

Cost of sales as a percentage of net sales was 79 percent for the nine months ended September 30, 2020 compared to 80 percent in the prior year period.

Gross margin at PC was favorably impacted by higher sales volumes, a favorable sales mix and better absorption on higher production volumes.

Improved margins at RUPS were due to a favorable sales mix in our Class I crosstie market and higher margins in our domestic utility pole and maintenance-of-way markets.

Lower gross margins for CMC in the current year period were a result of lower sales prices for carbon pitch, carbon black feedstock and phthalic anhydride.

Depreciation and amortization charges for the nine months ended September 30, 2020 were consistent with the prior year period .

Impairment and restructuring charges for the nine months ended September 30, 2020 were consistent with the prior year period .

The current year period primarily consists of charges for asset retirement obligations, fixed asset write-offs, severance, accelerated depreciation, demolition and other plant closure period costs related to the closure of our Denver, Colorado facility.

The prior year period primarily consisted of asset retirement obligation charges, accelerated depreciation and inventory and fixed asset write-offs related to the closure of our Follansbee, West Virginia facility.

Selling, general and administrative expenses for the nine months ended September 30, 2020 were $8.2 million lower when compared to the prior year period due mainly to a decrease in consulting and professional service expenses, travel and facility related costs and employee related benefits.

Interest expense for the nine months ended September 30, 2020 was $8.7 million lower when compared to the prior year period primarily due to our lower average debt level and lower interest rates due to the significant decrease in LIBOR rates.

Income tax expense for the nine months ended September 30, 2020 was $14.8 million, an increase of $5.1 million when compared to the prior year period.

The increase is primarily due to i ncome before income taxes being $33.3 million higher in the period ended September 30, 2020 when compared to the prior year period.

The increase is partially offset by a lower estimated annual effective income tax rate in the nine months ended September 30, 2020 when compared to the prior year period.

Income tax expense as a percentage of pre-tax profit for the nine months ended September 30, 2020 and 2019 were 17.4 percent and 18.7 percent, respectively.

Discrete items for the nine months ended September 30, 2020 and the nine months ended September 30, 2019 were approximately the same.

See Note 10 – “Income Taxes” for further detail about the estimated annual effective income tax rate and about the specific discrete items.

Discontinued operations for the nine months ended September 30, 2020 resulted in a loss of $3.8 million compared to income of $5.0 million in the prior year period due primarily to a year-over-year reduction in net sales of $93.1 million attributable to the economic effects of COVID-19 on our KJCC operations and lower end market demand.

Gain on sale of discontinued operations for the nine months ended September 30, 2020 is related to the sale of our KJCC business in China in September 2020.

See Note 4 – “Discontinued Operations” for further detail.

Segment Results.

Segment operating profit for the six months ended June 30, 2020 and 2019 is summarized by segment in the following table:

Six Months Ended June 30,

Segment operating profit for the nine months ended September 30, 2020 and 2019 is summarized by segment in the following table:

Nine Months Ended September 30,

(Dollars in millions)

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Operating profit as a percentage of net sales increased to 6.8 percent from an operating profit of 5.6 percent in the prior year period.

Operating profit as a percentage of net sales for the six months ended June 30, 2020 was favorably impacted by higher margins in our domestic utility pole and maintenance-of-way markets, a favorable sales mix in our commercial crosstie market and lower selling, general and administrative costs in the current year period.

Operating profit as a percentage of net sales for the nine months ended September 30, 2020 was favorably impacted by higher margins in our domestic utility pole and maintenance-of-way markets, a favorable sales mix in our Class I crosstie market and lower selling, general and administrative costs in the current year period.

PC operating profit increased by $28.6 million compared to the prior year period.

Operating profit as a percentage of net sales increased to 16.9 percent from 11.2 percent in the prior year period.

These favorable factors were partially offset by a net amount of $1.0 million due to changes in unrealized gains and losses from our copper swap contracts and $3.0 million of insurance proceeds recognized in the prior year period.

CMC operating profit decreased by $14.4 million compared to the prior year period.

Operating profit as a percentage of net sales decreased to 5.5 percent from an operating profit of 8.7 percent in the prior year period.

Operating profit for the six months ended June 30, 2020 was negatively affected primarily by lower sales prices for carbon pitch and carbon black feedstock globally and lower sales prices for phthalic anhydride in North America as a result of depressed oil prices.

Other contributing factors include lower sales volumes of carbon pitch and carbon black feedstock in Europe and North America as a result of the pandemic.

Net cash provided by operating activities for the six months ended June 30, 2020 was $22.2 million compared to net cash provided by operating activities of $1.4 million in the prior year period.

The net increase of $20.8 million in cash provided by operations was due primarily to lower working capital usage of $15.9 million compared to the prior year period, mainly due to improved inventory turnover in the current year period.

In addition, the change in income and certain operating activities of $4.9 million from the prior year period had a favorable result on cash provided by operations in the current year period.

Net cash used in investing activities for the six months ended June 31, 2020 was $26.4 million compared to net cash used in investing activities of $15.0 million in the prior year period.

The net increase in cash used for investing activities of $11.4 million is primarily due to an increase in capital expenditures of $8.0 million in the current year period.

In addition, cash provided by insurance proceeds for capital expenditures of $3.0 million was received in the prior year period.

Net cash provided by financing activities was $3.9 million for the six months ended June 30, 2020 compared to $15.1 million of net cash provided by financing activities in the prior year period.

The cash provided by financing activities in the six months ended June 30, 2020 reflected net borrowings of debt of $4.8 million partially offset by repurchases of common stock of $1.2 million related to long-term incentive compensation plans.

The cash provided by financing activities in the prior year period reflected net borrowings of $16.3 million partially offset by repurchases of common stock of $0.9 million related to long-term incentive compensation plans.

Operating profit for the nine months ended September 30, 2020 was negatively affected primarily by lower sales prices for carbon pitch, carbon black feedstock, phthalic anhydride and naphthalene as a result of depressed oil prices in the current year period.

Other contributing factors include lower sales volumes of carbon pitch and carbon black feedstock as a result of the pandemic.

These decreases were offset, in part, by volume increases of carbon pitch in Australia.

Net cash provided by operating activities for the nine months ended September 30, 2020 was $65.5 million compared to net cash provided by operating activities of $57.0 million in the prior year period.

The net increase of $8.5 million in cash provided by operations was due primarily to an increase in net income as well as a positive net change in certain other operating activities of $24.2 million from the prior year period, which had a favorable result on cash provided by operations in the current year period.

These drivers were partly offset by higher working capital usage of $15.7 million compared to the prior year period, mainly due to an increase in accounts receivable in the current year period.

Net cash provided by investing activities for the nine months ended September 30, 2020 was $35.0 million compared to net cash used in investing activities of $23.5 million in the prior year period.

The net increase in cash provided by investing activities of $58.5 million is primarily due to net cash of $78.1 million provided by the sale of KJCC partly offset by an increase in capital expenditures of $17.0 million in the current year period.

Net cash used in financing activities was $93.7 million for the nine months ended September 30, 2020 compared to $33.0 million of net cash used in financing activities in the prior year period.

The cash used in financing activities in the nine months ended September 30, 2020 reflected net repayments of debt of $93.1 million and repurchases of common stock of $1.2 million related to long-term incentive compensation plans.

The cash used in financing activities in the prior year period, reflected net repayments of $32.2 million and repurchases of common stock of $0.9 million.

Liquidity and Capital Resources

We have a $600.0 million senior secured revolving credit facility and a $100.0 million secured term loan facility (collectively, the “Credit Facility”) with a maturity date of May 2024.

We have a $600.0 million senior secured revolving credit facility and a $100.0 million secured term loan facility (collectively, the “Credit Facility”), as amended, with a maturity date of May 2024.

The interest rate on the Credit Facility is variable and is based on LIBOR.

On February 26, 2020, we entered into the Fourth Amendment as described in Note 14 – “Debt”.

Restrictions on Dividends to Koppers Holdings

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The basket is governed by a formula based on the sum of a beginning amount, plus or minus a percentage of Koppers Inc.’s consolidated net income (as defined in the indenture), plus the net proceeds of Koppers Inc.’s qualified stock issuance or conversions of debt to qualified stock, plus the net proceeds from the sale of or a reduction in an investment (as defined in the indenture) or the value of the assets of an unrestricted subsidiary which is designated a restricted subsidiary.

At June 30, 2020, the basket totaled $179.4 million.

At September 30, 2020, the basket totaled $217.2 million.

Notwithstanding such restrictions, the indenture governing the 2025 Notes permits an additional aggregate amount of $0.30 per share each fiscal quarter to finance dividends on the capital stock of Koppers Holdings, whether or not there is any basket availability, provided that at the time of such payment, no default in the indenture has occurred or would result from financing the dividends.

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and its restricted subsidiaries to meet certain financial ratios.

As of June 30, 2020, we had $157.5 million of unused revolving credit availability for working capital purposes after restrictions by various debt covenants and certain letter of credit commitments.

As of June 30, 2020, $7.1 million of commitments were utilized by outstanding letters of credit.

The following table summarizes our estimated liquidity as of June 30, 2020 (dollars in millions) :

As of September 30, 2020, we had $305.7 million of unused revolving credit availability for working capital purposes after restrictions by various debt covenants and certain letter of credit commitments.

As of September 30, 2020, $7.0 million of commitments were utilized by outstanding letters of credit.

In the third quarter of 2020, we used the net proceeds of the KJCC sale to reduce our borrowings under the revolving credit facility.

Under the terms of the Credit Facility, net proceeds must be used to reduce term loan borrowings within a specified period.

Accordingly, we expect that we will repay term loans of approximately $10 to $20 million in the fourth quarter of 2020.

Any amount of repaid term loan borrowings will not be available for future borrowing liquidity.

In addition, as of December 31, 2020, our total secured leverage ratio will not be permitted to exceed 2.75 times and our total leverage ratio will not be permitted to exceed 5.0 times due to a scheduled reduction of these ratios under our credit agreement.

We expect the effect of the step down of these covenant ratios to reduce our liquidity by approximately $50 million as of December 31, 2020.

The following table summarizes our estimated liquidity as of September 30, 2020 (dollars in millions) :

Cash and cash equivalents (1)

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Total estimated liquidity

Cash includes approximately $30.8 million held by foreign subsidiaries.

Cash includes approximately $35.8 million held by foreign subsidiaries and excludes approximately $2.3 million of restricted cash.

Our estimated liquidity was $254.6 million at December 31, 2019.

Our remaining need for cash in the next twelve months relates primarily to contractual obligations which include debt service, pension plan funding, purchase commitments and operating leases, as well as working capital, capital maintenance programs and the funding of plant consolidation and rationalizations.

Our need for cash in the next twelve months relates primarily to contractual obligations which include debt service, pension plan funding, purchase commitments and operating leases, as well as working capital, capital maintenance programs and the funding of plant consolidation and rationalizations.

We may also use cash to pursue other potential strategic acquisitions or voluntary pension plan contributions .

Capital expenditures in 2020 , excluding acquisitions, if any, are expected to total approximately $5 5 to $ 6 0 million and are expected to be funded by cash from operations .

We anticipate that our estimated liquidity adjusted for the pay down of the term loans and step down of the covenant ratios discussed above will continue to be adequate to fund our cash requirements for the next twelve months.

Debt Covenants

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The fixed charge coverage ratio, calculated as of the end of each fiscal quarter for the four fiscal quarters then ended, is not permitted to be less than 1.10.

The fixed charge coverage ratio at June 30, 2020 was 2.24.

The fixed charge coverage ratio at September 30, 2020 was 2.37.

The total secured leverage ratio, calculated as of the end of each fiscal quarter for the four fiscal quarters then ended, is not permitted to exceed 3.00.

The total secured leverage ratio at June 30, 2020 was 2.06.

The total secured leverage ratio at September 30, 2020 was 1.51.

The total leverage ratio, calculated as of the end of each fiscal quarter for the four fiscal quarters then ended, is not permitted to exceed 5.25.

The total leverage ratio at June 30, 2020 was 4.49.

The total leverage ratio at September 30, 2020 was 3.83.

We are currently in compliance with all covenants governing the Credit Facility.

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Effects of COVID-19 on our Liquidity

As of June 30, 2020, we are in compliance with our debt covenant metrics and had $190.5 million of liquidity to fund our operations.

As of September 30, 2020, we are in compliance with our debt covenants under the Credit Facility and had $342.9 million of liquidity to fund our operations.

Our estimates and assumptions as of the date of this report indicate that we should remain in compliance with our debt covenants and we have identified actions we can implement to help maintain compliance if the impact of COVID-19 has a more pronounced impact on the economy, our business and our ability to generate cash flow and profits than estimated.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis